tisdag 29 mars 2016

Canacol analyser

CNE Canaccord Genuity Update

3/29/2016 | Canaccord Genuity
Company Update
Positioning for new gas contracts
Canacol reported relatively in-line year-end results. Adjusted quarterly funds from operations (i.e., including the Ecuador IPC and excluding cash interest expenses) came in at $8.5 million versus our $10.7 million estimate; variances related to inventory builds, operating and G&A costs and realized oil prices. Capital spending of $22.4 million (including Ecuador) was largely in line with our $20.2 million estimate.

One surprise was Canacol's 15% investment in Pacific Power Generation Company for $11.6 million. According to its website, Pacific Power is dedicated to the generation and sale of electricity in Colombia, Ecuador and Haiti. We believe Canacol made this strategic investment to help secure future gas contracts.

The company has entered the planning phase of a new gas pipeline project, with the aim of increasing gas sales by 100 MMcf/d in 2018. To that end, the 2016 budget is focused on gas exploration to potentially fill the new pipeline. While drilling is likely several months away, the $52 million program will target 100 Bcf of unrisked resource potential.
In the very near term, investors can look forward to Canacol's 90 MMcf/d gas ramp up over the next couple weeks.

Q4 highlights
• Production for the quarter came in at 8,887 boe/d, in line with our 8,858 boe/d estimate.
• Operating netbacks of $13.25/boe (excluding Ecuador) were slightly below our $14.70/boe estimate due to realized oil prices and higher-than-expected operating costs. During the quarter, the company was able to reduce per-barrel operating expenses even with a 29% reduction in oil volumes QoQ. Year-over-year, operating expenses have declined due to supplier negotiations, a weakening peso, and operating efficiencies.
• During the quarter, gas prices averaged $5.07/mcf, with realizations as high as $5.50/mcf at Clarinete. Based on current gas contracts, prices at Esperanza are expected to escalate from $4.75/mcf in 2015 to $6.60/mcf in 2017.
• Quarterly G&A expenses of $8.6 million were above our $4.8 million estimate, partly due to $1.7 million in severance costs. G&A reductions will remain a core focus in 2016.
• With a working capital surplus of $46 million and total debt $248 million, year-end net debt stood at $202 million. During the quarter, the company recorded a non-cash impairment of $44.6 million on its oil properties. Gas properties were unaffected.

Valuation and thesis
We maintain our BUY recommendation given Canacol's expected gas ramp-up, low cost asset base, and exploration upside potential. The company has very little exposure to global oil and gas prices, but trades at a discount to fixed commodity contracts (C$5.05/sh, with C$4.10/sh attributable to Colombian gas). Using a DCF model, we estimatea Base NAV of C$5.75, which we discount in establishing our C$5.00 target. Canacol currently trades at a 2016E EV/DACF multiple of 5.5x versus the peer average of 4.4x. 


Canacol reported marginally lower Q4 (Calendar 2015) production and cash flow, but reiterated it remains on track to achieve overall gas production of 90 mmcf/d (vs ~21,200 mmcf/d in Q4).
■ In our view, the ability to achieve a near doubling of production and cash flow in 2016E is just the starting point for Canacol as the company sets its sights on new gas pipelines that could add 100 mmcf/d incremental capacity for 2018.
■ However, Canacol reported lower than expected Q4/15 (calendar) CFPS of $0.01 versus our estimate of $0.06,
largely on the back of lower production of 9,064 boe/d versus our 10,743 boe/d and higher G&A expense.
■  We reaffirm our Sector Outperform rating on Canacol and one - year target price of $4.50 per share, based on our revised Risked NAVPS of $4 .75 (vs $4.19).  In our view, Canacol's lower sensitivity to crude prices and rising production make it a more defensive name amid weak oil prices that can potentially offer downside protection at an attractive valuation.
TD Waterhouse:
Better-than-expected Calendar 2015 Results Event Yesterday (after market), Canacol Energy released its calendar 2015 year-end results and annual information form.
The company recently (March 16) pub lished its 2015 year-end reserves, limiting the scope for surprises on operational performance.
Q4 CFPS of $0.05 beat our estimate of $0.03.
Better Y/E net debt of $187 million compared with our estimate of $202 million.
Operating cost of $6.76/BOE was lower than our estimate of $8.50/BOE, which offset a higher royalty of $2. 42/BOE compared with our estimate of $2.08/BOE. This resulted in a higher net operating netback of $21.97/BOE versus our estimate of $19.93/BOE and contributed to a cash netback of $10.16/BOE compared with our estimate of $6.42/BOE.
Capex guidance of $52 million for 2016 is down 37% from the $82 million spent in calendar 2015 and compares with our previous estimate of $68 million. The 2016 capital program will mainly focus on exploration for additional gas reserves.
With gas sales anticipated to ramp up to 90mmcf/d by the end of March, we await further details regarding gas infrastructure projects, which could provide the company with additional capacity (100mmscf/d in 2018) for selling gas into Colombia’s Caribbean coast.
We maintain our ACTION LIST BUY rating and C$5.00 target price.
We continue to be attracted to Canacol for its long-life reserves and resources with limited exposure to the global oil prices owing to its Colombian gas focus. The company has a clear road to significant cash flow growth, benefiting from a significant ramp-up in gas production this year, supported by strong demand for gas-fired power generation in the region. Our main cautionary consideration is that Canacol’s net debt levels are above the average of its peer group. However, we are confident that the company’s fixed-price gas sales contracts give it a large and relatively predictable future cash flow stream that supports the expected debt levels. Canacol is currently trading at a discount to the averag e of its closest peers in our coverage on Base NAVPS and EV/DACF metrics. We expect the valuation gap to reduce as the company continues to demonstrate a steady pace of progress towards achieving its 2016 gas production targets.

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